If we use Game Theory, Brexit negotiations appear to be a game of chicken or a hawk–dove game. It describes a model of conflict between two players. Two drivers racing towards each other, for example. Unless one swerves, both die, but the one who swerves first becomes the “chicken” and loses the game. This seems to be the template for the strategies of the two sides and the tension can only grow higher, as the discussions about the thorny issue of a future trade agreement are set to start in March. The views and expectations are divergent. But both parties have a lot to lose if they walk out with no deal. High time pressure is getting higher, as negotiations have to be concluded in less than a year.
The first stage of the Brexit negotiations has been concluded in mid-December 2017. The EU imposed its terms. As previously discussed in the Brexit means Business series, the European negotiation team had a mandate to discuss with the U.K. only about citizens’ rights, the Irish border and the Brexit bill. Only after “sufficient” progress in these three areas, the negotiations could advance and touch on other topics, like the future trade relationship between the EU and the U.K. As “sufficient” is impossible to measure in objective terms, this word actually meant that the European Union was expecting Britain to fully comply with requirements set by Brussels before any other discussions. And this is pretty much what happened.
-> The rights of the EU citizens living in Britain and of the Britons living in the EU will be protected after Brexit. They can continue “to live, work or study as they currently do under the same conditions as under Union law”
-> the U.K. will avoid re-imposing a ‘hard border’ between Northern Ireland and Ireland and “in the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal [Single] Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 [Good Friday] Agreement (GFA).” It remains to be seen how this will be done, as it may translate into different rules applying to Northern Ireland compared to the rest of the U.K.’s territory. (London seeks to make its own rules and not comply anymore with the ones in the EU)
-> Britain will continue to contribute to the EU’s annual budgets up until 2020 (probably more than 40 billion pounds)
According to the decision of the European Council, the “negotiations in the second phase can only progress as long as all commitments undertaken during the first phase are (…) translated faithfully into legal terms as quickly as possible.” Therefore, European leaders expect Britain to turn all the agreements into law before moving forward.
The trade agreement can only be established once Britain leaves the EU and the U.K. will officially become a third country. The European Council authorized preliminary and preparatory discussions for creating a framework for the future economic partnership. But this will be included in a political declaration to be signed along with the Withdrawal Agreement (and referred to in the Agreement). The final trade deal will be negotiated after Brexit.
January 29th, 2018 – Meeting of the General Affairs Council in an EU27 format where negotiating directives on the transitional arrangements are to be adopted. Soon after, the negotiations on a transition period are expected to start.
March 22nd-23rd, 2018 – European Council Meeting. If everything goes according to the plan, European leaders will give the Commission negotiation guidelines for the trade talks. Afterwards, the long awaited discussion on a future trade deal between Britain and the European Union should start.
October 18th – 19th, 2018 – The British Government hopes to have an outline of the future trade agreement, which should be discussed in the European Council taking place on the 18th and 19th of October. Afterwards, the document needs to be approved by all EU capitals before the actual divorce.
March 29th, 2019 – Britain leaves the European Union. The transition period begins. Discussions on the detailed trade deal start. The deal will have to be ratified by more than 35 national and regional parliaments before the transition period ends.
At this stage, the EU and the U.K. have divergent views about the next steps:
-> Michel Barnier, the EU’s chief Brexit negotiator stated that the EU would not allow any transition period that goes beyond 2020, when the current multiannual financial framework of the EU ends. Yet, in Britain, there are talks about a two-year transition period (which many economical analysts say is not enough anyway). Prime Minister Theresa May said, in her Parliament address, that the matter is still subject to negotiations. The transitional period is also creating divisions inside May’s Conservative Party, as hard stance brexiteers see it as a time when Britain will be a “vassal” state, as it is very likely that Britain will have to obey EU rules without actually being part of the decision process. The European Council decided that “the United Kingdom, as a third country, will no longer participate in or nominate or elect members of the EU institutions, nor participate in the decision-making of the Union bodies, offices and agencies.”
-> Both sides think of CETA (EU’s trade deal with Canada) as a possible template for the new trade deal. CETA took 7 years to negotiate, but as it became a precedent, both sides think discussions will take a lot less this time. CETA entered into force in September 2017 and removed 98 percent of tariffs resulted from EU-Canada trade. Gradually, this proportion will get to 99 percent. A CETA-like agreement would follow U.K.’s red lines, for example: U.K. will not be under the jurisdiction of the European Court of Justice, there would be no rules regarding free movement and no substantial financial contribution. But CETA does not include the services sector and Britain’s main aim is to change this, as services account to about 80 percent of its GDP, with financial services being a substantial part. However, Michel Barnier was trenchant and said that such services cannot be privileged in the future trade agreement (as something like this has never happened before).
Negotiation Techniques. The European Side.
From now on, unity is the main issue for the remaining EU member states during the negotiations with Britain. The first stage of negotiations dealt with issues on which member states easily agreed, like the situation of EU citizens in the United Kingdom or London’s contribution to the EU budget. Actually, what happened was hardly a negotiation, as the Council forged some guidelines that gave very little space to further discussions to the Commission. The European negotiation team has no actual power to change anything. It had to stick to the Council’s decisions. Negotiators are high EU functionaries, not politicians.
Discussions regarding the future trade deal between the EU and the United Kingdom could be totally different, as they involve issues on which member states could have different opinions (as is the case of financial services and aviation sectors, for example). In addition to this, although economic relations are the central theme, security cooperation should not be forgotten. Over 25 percent of the EU military capabilities come from Britain. Therefore, remaining member states will probably seek some kind of agreement. (In an effort to give an unity signal in the context of Brexit, 25 member states have recently signed the PESCO – Permanent Structured Cooperation – military cooperation pact and will start to integrate their military plans. The first steps towards such a cooperation in Europe were made almost two decades ago and the initiative is expected not to advance fast, therefore EU security will remain dependent on NATO in the foreseeable future.)
Negotiation Techniques. The British Side
The British government is trying to extend the negotiations to places where it could actually change something – and hope to talk to the EU member states capitals. Recently, high U.K. officials visited Germany, in an attempt to charm the Germans and convince them to support a trade deal that includes financial services. They say that otherwise, Europe is headed towards an economic catastrophe. Ireland, Hungary and Poland have already hinted that they would become Britain supporters over the next phase of the negotiations, backing a trade deal which allows uninterrupted trade in both goods and services. (Poland’s influence is questionable at this point, as the country could lose voting rights in the EU institutions over controversial reforms of the judiciary). But, this technique to divide and conquer EU member states could end up even worse for the U.K. If Britain does not manage to convince enough countries, it will only create fragmentation in the Council, making any agreement harder to reach.
Decisive months for businesses
The year started off on a sour note for the United Kingdom, as the European Commission has issued warning memos for different British industries (pharma, aviation and transport are among them) regarding the consequences of Brexit. The companies were warned that they would not be able to operate across the EU without a deal on Brexit. British firms and NGOs applying for EU funding also face a legal disclaimer, which warns them that, even if they win the grants, after their country leaves the Union, they will stop receiving money.
Besides informing, the Commission is making a tough move in a key moment. The memos and disclaimers are not meant to just be warnings for businesses, but also be a warning for the British government not to back down on turning the agreements from the first round of negotiations into law. Brussels is trying to convince London that, unless its requirements are met, it is ready for a ‘no deal Brexit’. U.K.’s chief negotiator for Brexit, David Davis, has informed Theresa May about these memos in an upset letter. Davis underlined that such documents encouraged U.K.-based entities to move from the U.K. elsewhere in Europe. In response, the Commission said it was “surprised that the U.K. is surprised that [the EU is] preparing for a scenario announced by the U.K. government itself”. British Prime Minister Theresa May has said repeatedly that “no deal is better than a bad deal.”
Besides these memos, the private sector received an optimistic signal at the end of the first round of negotiations. As Britain changed its stance and accepted the conditions imposed by the EU in order for the discussions to move on, it is more and more clear that London does not believe that “no deal is better than a bad deal” anymore. Therefore, it could accept even more conditions during the second phase, just to minimize Brexit’s impact on its own businesses.
The EU, at its turn, has made clear that, in case of a no deal Brexit, it will not accept any “empty shell” companies operating on its grounds. Therefore, companies (including banks) that want to work within the remaining EU member states would have to set new headquarters there. With all the bureaucracy involved, these relocations would take at least six months. Normally, they would have to start the process in the next months, but a transition period would give them more time to gain (maybe) more clarity on where the Brexit negotiations are headed. The EU will start negotiating and deciding on the transition period in March 2018, giving businesses more time to think through their strategies following Brexit. It is likely that an agreement on the transition period will be made in October.